Pricing dynamic fund protection under a Regime-switching Jump-diffusion model with stochastic protection level

Abstract

In this paper, we investigate the valuation of dynamic fund protections under the assumption that the market value of the basic fund and the protection level follow regime-switching processes with jumps. The price of the dynamic fund protection (DFP) is associated with the Laplace transform of the first passage time. We derive the explicit formula for the Laplace transform of the DFP under the regime-switching, hyper-exponential jump-diffusion process. By using the Gaver-Stehfest algorithm, we present some numerical results for the price of the DFP.